Indirect taxes

Value Added Tax (VAT)

Type of Tax Indirect
Collected by Provincial Government
Paid by Natural persons and Corporates entities
Tax base Cost of the asset or service purchased
Abatements in the base None
Net tax base Cost of the asset or service purchased
Tariff or Rate

Extra-reduced rate: 4%

Reduced rate: 10%

General rate: 21%
Liability Calculated by applying the tax rate to the net tax base
Deductions   None
Surcharges The tax liability calculated above

This tax first came into force in 1992 in the then European Economic Community (the precursor to today's European Union); it replaced a number of other different types of tax and was intended to help progress towards the unification of taxes in the European Union. Nonetheless, the VAT rate varies from country to country.

What is this tax levied on?

Value Added Tax (VAT) is an indirect tax on consumption, derived from the purchase of goods or professional services. It is passed on to the end consumer. 

VAT is a tax which is passed on through the entire chain of production (companies pay VAT on any items they purchase and then pass it on in their sales); this process ends with the consumer of those goods, products and services, who ultimately pays the tax.

Companies at intermediary stages in the production chain pay the revenue office the difference between the VAT on what they buy and the VAT they pass on (to their customers) when they sell the finished product or service. Or to put it another way: for most companies, VAT does not represent either income or expense, but a credit or debt with the revenue office.

Companies and professionals are required to submit VAT returns to the Provincial Government.

How is the amount payable calculated?

  1. Tax base:  Because this is a tax on consumption, the tax base is the value of the asset or service purchased.
  2. Abatements in the base: None.
  3. Net tax base:  Same as the tax base.
  4. Tariff or Rate: The more essential and necessary an item is, the lower the VAT rate applied. When you're doing the shopping, have you ever noticed that you may be charged up to 3 separate VAT rates? The reason is as follows:
    • Extra-reduced rate, 4%. This rate applies to essential products: vegetables, milk, bread, fruit...
    • Reduced rate, 10%. This rate is applied to general foodstuffs (except those listed above); to transport of people, homes, entry to museums, art galleries, etc.
    • General rate, 21%. This is the rate that applies to the purchase of most products and services. Among others, it is charged on: household appliances, clothing, footwear, DIY material, tobacco products, alcoholic beverages, concert/theatre/cinema tickets, mobile phone services and hairdressing services, etc.
  5. Liability: Calculated by applying the corresponding tax rate to the net tax base.
  6. Deductions: None.
  7. Amount payable: The tax liability calculated above.

Example

As you can see, at the end of the whole process, the revenue office collects €1,071 (i.e. 210+546+315= 1,071).

  • A farmer has sold cotton to a shirt manufacturer for €1,000. He has added 21% VAT to this price, and the shirt manufacturer therefore has to pay a bill of €1,210. The farmer has to declare €210 to the revenue office for the VAT charged.
  • The shirt manufacturer has in turn sold the shirts he has manufactured to a shop for €3,600 plus VAT (at 21%); in other words, the manufacturer has charged a total of €4,356. For that sale, the manufacturer has to declare €756 to the revenue office, but because he had to pay €210 VAT when he bought the cotton, he really only has to pay the Revenue Office €546 (756-210).
  •  The vendor has sold the shirts to his customers for €5,100 plus 21% VAT. He will receive €1,071 in VAT of which he will have to pay €315 (1,071 - 756) to the revenue office, since he paid €756 when he bought the shirts.

Time to get working!